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The Jenga Equity Market

Yesterday I was talking with my firm’s Chief Investment Strategist about the market internals that have been weakening and the likelihood of the S&P hitting a new high. I realized that the market is simply playing a game of Jenga. We all remember playing Jenga, taking your turn to pull out a piece and setting it on top with the hopes that the tower wouldn’t come crashing down. The equity market’s tower has been getting taller, but just like in Jenga – the base has been weakening.

I discussed last week the charts that were concerning me regarding the integrity of the advance taken by stocks. In the short-term this is okay, the tower can still get taller with each brick that’s removed and put on top and we live to fight another day. But at some point the tower’s base becomes compromised and it topples, to what degree of damage is done is unknown and not something we can predict or focus on.

I would be very surprised if we don’t break above the 2007 peak in the S&P. It’s often said that stocks are attracted like a magnet to round numbers, and the same could be said with new highs. We could very well see a few points over the ’07 peak as the last few reluctant buyers step in. However, we still must contend with the dilapidated base and the risk associated with those last few S&P points (Jenga bricks) we need to get to a new high.

One of the great things about technical analysis is the ability to allow price to shine the light and lead the way down the path of investing. Technical Analysts don’t have to worry about ‘fair value’ ‘cash flow’ or ‘historical earnings’. We have the ability to recognize the yellow flags the market shows us and wait and see if price confirms. I’ve been discussing these yellow flags of concern for the last two months or so, I would have thought we’d see some form of price reaction, but by not being trigger happy we can sit patiently and let the price action do it’s thing. Will we break the high? Like I said, I would be surprised if we don’t. But that doesn’t erase the risk of the market’s game of Jenga toppling over at some point.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.